Warning on
final salary pensions

BBC
News, July 4, 2002

Complaints have increased by 27%, as BBC News Online
revealed in April

Pension holders risk losing their
life savings if their employer goes bust, the pensions advisory service
has warned.

Final salary pension schemes are only as good as your employer
is

Malcolm McLean, Opas

In one case highlighted, a saver lost
most of his 38 years of pension contributions when his company went bust.

In its annual report, the pensions
advisory service, known as Opas, said inadequate rules were failing to
protect members when schemes were wound up or the employer went bust.

Final salary schemes are commonly
seen as the most generous and most secure type of pension.

Unlike money purchase schemes,
salary-related pensions are supposed to guarantee an income in retirement.

Opas is now calling for better
legislation and improved funding requirements to prevent similar problems
arising in the future.

Only as good as employer

Money purchase schemes are normally
seen as more risky schemes, as individuals must shoulder all the
investment risk themselves.

In this sense, they are seen as the
poor relation of final salary schemes.

But Opas chief executive Malcolm
McLean, told BBC News Online that people should remember that final salary
pension schemes were "only as good as your employer is".

"The employer has got to be
there and solvent."

In some cases, people would have been
better off in a money purchase scheme, he said.

"It does temper the notion that
final salary schemes are always better than money purchase schemes,"
Mr McLean said.

Main problems

The report highlights two main
problems:

Insolvency: If a company goes bust,
existing pensioners, including those who have taken early retirement, get
priority. The fund is divided up and those who have not yet retired, even
if they are not long off retirement or have delayed taking their pension,
can be left with nothing. Opas is recommending a change to address this
issue.

Voluntary wind-ups: When the employer
is solvent but chooses unilaterally to close down the scheme for other
reasons, full accrued pension rights do not have to be met - pensions are
calculated on the basis of a "transfer value" which is likely to
secure only 70-80% of the pension actually earned by the member up to the
date of wind-up. Opas is calling for legislation to require the scheme to
meet the pension in full.

Independent trustees

Opas is also calling for independent
trustees to be licensed.

What is an independent trustee?

Someone who is brought into administer the pension scheme. They
are appointed by the liquidator.

When a company goes into
receivership, independent trustees are appointed by the liquidator to
administer the pension scheme, but there are few checks on their work or
conduct.

In one case reported to Opas, fees
paid to trustees were £21,000 a year before the company folded.

Seven years on, the scheme is still
not closed and the trustees are costing £150,000 a year.

Opas said that the poor checks on
independent trustees could potentially create fraud and a "scope for
the cowboy to come in."

Mr McLean said: "In theory,
anyone can set themselves up as an independent trustee without any
particular qualification or seeking authority from an official body."

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